Bottoms Up Diaper Service is considering the purchase of a new industrial washer

Question

Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $3,300 and sell its old washer for $900. The new washer will last for 6 years and save $700 a year in expenses. The opportunity cost of capital is 11%, and the firm’s tax rate is 40%. a. If the firm uses straight-line depreciation to an assumed salvage value of zero over a 6-year life, what is the annual operating cash flow of the project in years 1 to 6? The new washer will in fact have zero salvage value after 6 years, and the old washer is fully depreciated. Annual operating cash flow $ b. What is project NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV $ c. What is NPV if the firm uses MACRS depreciation with a 5-year tax life? Use the MACRS depreciation schedule. (Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV $

Explanation / Answer

c)

Time line 0 1 2 3 4 5 6 Cost of new washer -3300 Proceeds of old washer =selling price*( 1 -tax rate) 540 Total investment in new machine -2760 =Initial Investment outlay -2760 Savings 700 700 700 700 700 700 -Depreciation cost of washer/6 -550 -550 -550 -550 -550 -550 =Pre tax operating cashflow 150 150 150 150 150 150 -taxes =pretax cashflow*(1-tax) 90 90 90 90 90 90 +Depreciation 550 550 550 550 550 550 =after tax operating cash flow 640 640 640 640 640 640 Reversal of Net working capital 0 Proceeds from sale of assets =selling price*(1 - tax rate) 0 +Salvage book value * tax rate 0 Terminal year non operating cash flows 0 Total Cash flow for the period -2760 640 640 640 640 640 640 Discount factor =(1+discount rate)^n 1 1.11 1.2321 1.367631 1.51807 1.685058 1.870415 11% =discount rate Discounted cash flows -2760 576.5766 519.4384 467.9625 421.5878 379.8088 342.1701 NPV= Sum of discounted cash flows -52.45577361

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